Question

Briefly explain what a recession is and why it occurs.

Answer 1

Recession is a period in which the economy faces the lower level of aggregate demand where firms find it difficult to sell the output as people do not have enough income to purchase the goods and services. There are many reasons due to which the economy can enter in the period of recession, namely, high interest rate which makes it difficult for the firms to finance the investment, falling real wages which led to the higher unemployment rate as people don't want to work at the lower level of real wages, prolonged period of deflation in which firms find it difficult to earn the profit which makes them to reduce the future investment plan and fire the existing workers which contributes in the higher unemployment rate, and credit crunch where banks do not have enough money to lend to the borrowers for the investment purposes, all these reasons can lead to the recession in a economy.